The Monday Report

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By Greg Peel

Claret Run

Back last century in the days when the ASX actually used to close for lunch for a full hour and a half it was typical for market types to head out to a restaurant on a Friday, polish off a couple of bottles of red, rev each other up, and then come back for the afternoon session intent on buying. It was known as the Friday afternoon “Claret Run”.

If it weren’t for the fact the ASX no longer closes for lunch, and lunching is not as ubiquitous a sport as it once was in the stock market, one might have assumed the ASX200’s sharp turnaround from down 58 points at 2pm on Friday to close almost square was a Claret Run in action. Or in this day and age, perhaps a Shiraz Run.

Or maybe it was triggered by technical trading or simple dip-buying as the index again approached 4900 when it really wants to be at 5000. The big miners, which have fallen a long way, were again heavily sought after, no doubt aided by the week’s rebound in iron ore prices. The materials sector rose 2.9%.

Thereafter it was a very mixed bag among sectors, with the other resource sector – energy – up only 0.8%, the banks down 0.7%, healthcare down again and the week’s most popular trade – utilities – also down by 1.0%.

There may also have been an element of squaring up ahead of Friday night’s US jobs report.

Something for Everyone

Wall Street is currently in “bad is good” mode because the market does not believe the US economy is strong enough to cope with higher interest rates. A weak jobs number on Friday night was thus expected to evoke a positive response from the stock markets, and vice versa.

The result of 151,000 jobs added – missing forecasts of 189,000 and representing only around half of the December number – was therefore a good result. Briefly, Wall Street rallied. But there’s more to a monthly jobs report than just the raw measure of jobs added.

It might have been a low number but when one considers the big jump in December, the average is still strong. Indeed, the three month average of 231,000 jobs added per month is above average and thus potentially no reason to ensure the Fed will not hike again in March. And the unemployment rate fell to 4.9% from 5.0% to mark its lowest level since 2008.

But the number that ultimately startled Wall Street was wages growth. All through 2015, as US jobs growth numbers came in on the positive side, Wall Street expected the Fed to hike rates. A hike was possible in March, more expected in June, and considered baked in in September. But the Fed did not hike until December, and one important reason was a lack of any real wages growth until right at the end of the year.

Wages growth equals inflation. Earlier last week there had been talk that US inflation was running lower than the Fed had anticipated, and this was enough to send Wall Street into rally mode. But US wages suddenly jumped 0.5% in January. Averaging over six months, wages growth is now at its fastest pace since the GFC.

It was this number that spooked Wall Street, and suggested a March Fed rate hike is by no means off the table. There are also two more jobs reports to come before the Fed’s next meeting. Down went US stocks.

And up went the US dollar, by 0.6% on its index to 97.04. Commodity prices were weaker on the threat of more dollar strength to come, and the Dow finished down 211 points or 1.3% and the S&P lost 1.9% to 1880. But the big move was in the Nasdaq, which fell a full 3.3%.

There is little correlation between the tech-heavy Nasdaq index and oil prices, so this particular index has really been playing its own game these past couple of months. And within the index are all those new world, high-flying companies involved in everything from social media to electric cars, which boast PEs at fantasy land levels because it’s all about potential monetisation down the track and not about any E to speak of right at the moment.

On Friday night one of this group – LinkedIn, known as Facebook for grown-ups – posted a quarterly earnings report which fell short of expectation. It was not a shocking miss, but Wall Street sold the stock down 44% just the same. In a case of omigod, the Emperor’s not wearing any clothes, the market decided that maybe the PEs of some of these more esoteric of businesses are just a little over the top.

After Friday night, many are not so over the top any more.

Commodities

The jump in the US dollar on the night, and the implications of what in essence was a “strong” jobs report, was not good news for commodity prices.

West Texas crude fell US80c to US$30.87/bbl and Brent fell US38c to US$34.01/bbl.

In thin trading ahead of the Chinese New Year break, in which metals markets go very quiet, base metal prices tumbled following what had otherwise been a solid week. Copper fell 1.5%, aluminium and lead fell 2%, zinc fell 2.5% and nickel was thumped by 5%. Only tin held its ground.

Iron ore was steady at US$44.70/t and will likely remain so for all of this week.

Gold’s run continued, with the rejuvenated metal rising another US$17.40 to US$1173.00/oz.

And the good news is that the Aussie, which had shot up during the week as the US dollar had tanked, fell 1.8% to US$0.7070 on Saturday morning.

The SPI Overnight closed down 56 points or 1.1% on Saturday morning.

The Week Ahead

Further US data releases are thin on the ground this week until Friday, when retail sales, inventories and consumer sentiment numbers are released.

The highlight, however, will be Fed chair Janet Yellen’s scheduled testimonies to Congressional committees on Wednesday night and Thursday night. While it is likely she will be non-committal, Wall Street will be closely watching for any little hints of dovishness or hawkishness.

China will be closed all week for the New Year holiday. New Zealand is closed today and Japan is closed on Thursday.

RBA governor Glenn Stevens will also provide a parliamentary testimony this week, on Friday, following ANZ job ads today, NAB business confidence tomorrow, Westpac consumer confidence on Wednesday and housing finance numbers on Friday.

The local results season steps up a gear this week. Today’s releases include those from Ansell ((ANN)) and JB Hi-Fi ((JBH)), while throughout the week highlights include AGL, ((AGL)), Commonwealth Bank ((CBA)), Cochlear ((COH)), Rio Tinto ((RIO)) and Suncorp ((SUN)).

Please note the first FNArena Results Season Monitor for this February season was published on Friday and will now be added to each day as the month progresses.

Rudi will appear on Sky Business on Thursday at noon and again on that same day between 7-8pm for the Switzer Report.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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